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Slideshow Analysis: NetSpend's value questioned as new card players muscle in Tweet Share this Email Print Related News Starbucks embraces mobile payments with start-up Square Wed, Aug 8 2012 Visa adjusted profit beats as card payments grow Wed, Jul 25 2012 Analysis & Opinion Prepaid debit-card datapoints of the day Mobile technology boosts water security for the poor Related Topics Tech » Media » By Jochelle Mendonca and Sharanya Hrishikesh Thu Aug 23, 2012 11:16am EDT (Reuters) - Green Dot Corp's dim outlook is casting a shadow on NetSpend Holdings Inc as rising competition turns the two companies' high-margin prepaid cards into just another piece of plastic. NetSpend and Green Dot pioneered, and for 10 years dominated, the sale of prepaid cards that people without bank accounts can load up with value and use like a debit card. But as regulators clamped down on other revenue streams such as interchange rates and overdraft fees, banks have found a lucrative new business by issuing their own prepaid cards, often with lower fees than the two traditional players. JPMorgan Chase & Co, American Express Co, US Bancorp and Regions Financial Corp have all flocked to the market with cheaper offerings over the last year. Green Dot cards -- sold at Wal-Mart, Walgreens, CVS, and RiteAid stores -- are having to share the shelves with new rivals, ending their exclusivity. Green Dot last month cut its outlook, sending its stock sliding 60 percent. NetSpend has escaped the competition so far, as its cards are sold at check cashing bureaus and other alternative financial service providers. But as cheaper cards offered by the big banks spread, questions are being asked about how long NetSpend can avoid the same pain as Green Dot. "We question the sustainability of NetSpend's current earnings power and the valuation the market currently gives it," said Compass Point analyst Douglas Greiner, who this month cut the stock to "sell". "Specifically, we believe the prepaid card offering is increasingly looking like a commodity." NetSpend currently trades at 17 times expected 2013 earnings, according to Thomson Reuters StarMine. Green Dot, which had traded at a similar multiple just over a month ago, slid to about 8 times expected 2013 earnings after its disappointing outlook on July 27. "Your highest cost and your least functional cards are NetSpend and your Green Dot cards but their stocks trade at multiples that are double or triple those of other card companies," said a hedge fund manager whose fund invests in the prepaid industry. "Wall Street, in its efforts to gain fees from these companies, has put them on a different pedestal and compared them to different companies. In reality, they're not different companies. They are just credit card companies with limited functionality." CARD PACK WITH NO ACE Hampering Green Dot and NetSpend is the short life of their products. Prepaid cards are often sold as an alternative to a checking account but typically customers don't use one for more than about six months, a Federal Reserve Bank of Philadelphia study found. (bit.ly/Mvn8mD) That lack of user loyalty means prepaid card companies have to sell more and more cards to stay in the same place at a time when increased competition makes it harder to find new users. NetSpend had 2.2 million active cards at the end of June, down from 2.3 million in March and only marginally above the 2.1 million active cards it had in 2010, when it went public. Green Dot had 4.4 million cards at the end of June, down from 4.7 million at the end of March. NetSpend and Green Dot prepaid cards rank as some of the most expensive for users. JPMorgan Chase's Liquid card costs $59 per year and the American Express Bluebird card costs $110 per year, among the cheaper cards, according to calculations by card comparison website Nerdwallet (www.nerdwallet.com). That is much less than $192 for the Green Dot card and $349 per year for the NetSpend Prepaid FeeAdvantage card, based on the site's calculations. NetSpend says it is willing to compete aggressively on the sale price of its cards but argues that its cards offer more value than those of its rivals. "What they have is an extremely limited functionality-stripped down card that is very cheap, because the only thing they can compete upon is price. Whereas a product like ours gives you free money transfer, 5 percent interest on your savings, tremendous value," NetSpend Chief Executive Daniel Henry said. The company's average operating margin for the trailing four quarters was 19.3 percent, a full 10 percentage points below the industry average, according to Thomson Reuters StarMine. NetSpend's competitors are deep-pocketed companies, adding to the pressure. "The big players can be cheaper because they have the infrastructure and are willing to have slimmer margins," Manley Williams, a partner at Washington law firm Buckley Sandler, who has worked with companies on credit and prepaid card offerings. "They are going after clients hoping to build a relationship that will be more profitable in the future," Williams added. The end result may be a change in how people view prepaid cards and the business. "In our opinion, prepaid cards are at risk of becoming a loss-leader product better suited to scale players (banks, card issuers) who have a bundled offering," Janney Capital Markets analyst Thomas McCrohan said. Share sales by stakeholders are also raising concerns. NetSpend's largest shareholder, Oak Investment Partners, distributed 11.2 million shares to its investors, halving its stake in the company. "There continues to be rising anxiety about the long-term viability of prepaid card providers given increased competition and uncertain unit economics. The insider selling following the results is unfortunate," McCrohan said. (Editing by Rodney Joyce) Tech Media Related Quotes and News Company Price Related News Tweet this Link this Share this Digg this Email Reprints We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. 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